IPOs Can Be Tricky: Knowing Where To Look For Data

Quick recognition is crucial when investing in initial public offerings.

An IPO base can be much shorter than the typical flat, cup or double-bottom base, and the breakout can come unexpectedly.

Where should investors start their search for IPO information?

The New America page (today on A5) provides a good start. The section profiles a company, which is sometimes but not always a recent IPO.

As seen in today's paper, a "New Issue America" feature occasionally replaces the New America with detailed information on an upcoming IPO.

A chart of the "IBD New Issues Index" runs at the top of the page. It shows how new issues are performing vs. the S&P 500. The "Leading New Issues" box gives information on a handful of leading IPOs. The "AfterMarket" brief offers a capsule on an IPO stock.

The "IPO Filings Soon To Be Priced" table, often found on the New America page, provides awareness on what's ahead. "Prices Of Recent IPOs" offers stocks to follow up on.

IPOs can be tricky to play. A quick-forming base is no guarantee of success. Some IPOs take their time becoming winners.

Consider a few examples:

• Microsoft (MSFT) was only 22 sessions old when it cleared its first IPO base (1) in the spring of 1986. The stock rose about 18% and then formed another short pattern (2). The second pattern sagged after a breakout, leading to a longer consolidation (3).

The longer consolidation — completed seven months after the IPO — provided the first long run-up and a 35.60 entry point. Microsoft gained 260% in six-and-a-half months.

• Amazon.com (AMZN) broke out of a base seven weeks after its May 1997 debut. The breakout immediately sagged into a new eight-week consolidation. The breakout from that pattern led to an 825% gain in 10 months.

• Facebook (FB) debuted in May 2012. The stock immediately began a sharp dive. The first breakout past a valid buy point came on July 25, 2013 — 14 months after its debut. Facebook rose 111% past the breakaway gap close in less than eight months.

Market conditions and earnings can play roles in how an IPO does. Facebook was in an earnings trough when it debuted and the market was in a correction. The breakout in July 2013 occurred after earnings rebounded and during a market uptrend.

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